Not Applicable.
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This invention relates to the field of financial securities for enhancing the stock of a business entity and, in particular, to the joining of non-investment bonds to shares of that stock accomplished by a program that processes the complete joining including of information, payments and distributions.
A business entity or company faces daily challenges in their efforts to make their shares of stock increasingly more valuable. These companies have compelling reasons for wanting to enhance their stock""s value. The first is that the company can issue more shares for sale to raise money for company operations and not go into debt to do so. The second reason is so the company can reward the shareowners who profit when the shares increase in price. Pleasing the shareowners is important since they are the voters that will decide who directs and runs the company. Keeping shareowners happy and stock prices high are also invaluable in helping to prevent a proxy fight or hostile takeover. This helps the CEO and other top executives to maintain their jobs since takeovers often lead to the removal of the CEO and those executives.
While the above situations can make the stock price rise dramatically, shareowners will often sell the entire stock in a company at a price that is far less than the worth of the company""s assets. A profit is realized in the short term but is often less than the long term profit potential.
Enhancing the stock does not always mean the stock price will increase because other factors are always at work where stock prices are involved. Still enhancing the stock could help keep the price stable and avoid a stock price plunge in financially hard times, thereby preventing the picture-perfect climate for a hostile corporate takeover. Therefore stock enhancement provides benefits for the CEO, executives and shareowners.
The best and most efficient way to enhance the stock is by rewarding the shareowners as much and as directly as possible. Normally a company has three main ways of rewarding their shareowners. The first way is to use the profits of the company to invest in the company operations to increase profits in the future. This decreases the corporate taxes but does little for the shareowners. The second way is for the company to use the profits to buy back some of its own shares of stock, but this means that the shareowners who sell do not benefit from any price increase that may follow. The shareowners who sell also are unable to benefit from the larger dividends that are usually paid since there are now fewer shares to be paid from the corporation""s dividend pool. Even if the company buys a percentage of stock from each shareowner, the I.R.S. considers this a dividend and the amount is taxable at the corporate level. The third and most direct way of rewarding shareowners is by paying dividends to the shareowners. The problem with dividends is that they are included in the corporate revenue when paid, therefore are taxed at the corporate level and again by the capital gains tax. This double taxation on the same money reduces the money the shareowners receive. Current corporate tax rates are from fifteen to thirty-four percent with companies paying thirty-four percent on any profit over $75,000.
In spite of this large tax burden, many companies will still pay dividends out of the profits. Other companies will invest in company operations, buy other companies, pay executives large amounts of money, pay for expensive executive luxuries or use a combination of the four to avoid making a profit, and then pay dividends by either borrowing money or paying the dividends from the company savings. This practice becomes a temporary fix since savings not replenished with profits which are subject to tax, will eventually be exhausted. Continuing to borrow, if not supported by increased revenues, will eventually collapse under the debt burden like a house of cards. Still this is often done because the tax burden is so great, and yet the rewarding of shareowners to enhance the stock is so necessary.
The present methods and system are burdened with tremendous inefficiencies. The current environment leads many companies to abandon stock enhancement. These companies instead focus on using profits to expand the company and reward top executives. Instead of paying out money to the I. R. S. and shareowners, they often make poor acquisitions and CEO""S live like kings. If the company begins to suffer financially, they lay-off employees to increase profits and repeat the process. In the meantime the shareowners receive little or no dividends since dividends are not guaranteed. The stock price drops or becomes stagnant.
There have been some attempts to reward shareowners by using the debt-favoring provision of the U.S. tax laws: interest on bonds is deductible but dividends on stock are not. The financial bonds would be issued directly to the shareowner assuming roughly a thirty-four percent corporate-income-tax rate. A company that can pay shareowners a rate of nine percent on dividends can just as easily pay twelve percent interest on debt because it can deduct the interest. This solution is effective in the short term but a big problem arises immediately after the shareowners sell the stock but retain the bonds. The new shareowners will not receive the bond interest so they will find dividends sparse and soon falling stock prices. This will cause many corporate management problems since to continue to sell new bonds to all the new shareowners would send the company into bankruptcy. Even though the company receives money from the bond sales, the debt could collapse the company. Still the deductible interest on bonds is a beneficial component of any stock enhancement method or program.
There are a variety of financial bonds and their sole purpose is to to raise money for the institution that sells or issues the bonds. Bonds are generally considered to be investment securities that differ from stock in that bonds usually have guaranteed interest payments which are paid before dividends on stock. However, there are exceptions. Adjustable-rate convertible debt is a bond with no conversion premium and a coupon (interest) equivalent to or tied to the dividend on the underlying common stock. This convertible bond or note has a variable (floating rate) coupon by reference to a standard index rate. The guaranteed interest payment that exists with most bonds is a beneficial component of any stock enhancement method or program.
Bonds are more secure than stock because failure to pay interest or the principal amount on the bonds could legally force the company into bankruptcy. Stocks are more speculative. In the case of a corporate liquidation, the bondowners are in line to be paid before the stockowners. The corporate assets are usually distributed among those owed wages, holding loans, bonds and the end-of-the-line stockowner could receive nothing. The increased investment security of a bond is a beneficial component of any stock enhancement method or program.
Convertible bonds are presently the closest form available by which most of the afore mentioned enhancement elements of a bond are in some way tied to stock. A convertible security is one that permits the holder, at his or her option and under certain conditions, to exchange an issue for another security. Usually a convertible bond may be exchanged for common stock in the same company, but there are some exceptions in which the holder may receive preferred stock and others in which the security received is an issue of another company. Holders of a convertible security may exercise this option of exchange for a profit, increase yield, avoid a call, or for any other reason they believe valid. The problem with a convertible bond is that it is an either or proposition. The combined benefits are not exercised or capable of being utilized simultaneously. Once the bond converts to stock, the benefits associated with the bond disappear. When the bond portion of the security is in effect, the benefits that are usually associated with stock such as voting rights, possible stock price increases, possible stock splits and possible dividends are not available prior to conversion.
The best stock enhancement should retain the best elements of stock while adding other benefits. An example of an attempt to do this can be found in a corporate structure called pair-shared REIT""S(Real Estate Investment Trusts) or stapled entities. This structure links a share in a real estate investment trust, which is exempt from taxes at the corporate level, with a share in an operating company that can generate income other than rents and mortgages. The shares are paired to trade together as one unit. The problem with this structure is that it is confined to real estate investment trusts and Congress prohibited the structure from tax-exemption status in 1983. In the tax code Title26, SubtitleA, Chapter1, SubchapterB, PartII, Section269b, it is stated that stapled entities shall be treated as one entity with entity being defined as any corporation, partnership, trust, association, estate or other of carrying on a business activity. A handful of these pair-shared REIT""S were grandfathered in and today their stock value has increased greatly. So much so, that one of the existing pair-shared REIT""S just bought a major corporation (ITT) for billions in stock and cash while generating less than a half billion dollars in revenue. This demonstrates the potential power of true stock enhancement particularly when you consider that the pair-shared REIT""S pay most all profits out to the shareowners in dividends that are not double taxed on those profits.
A slightly different corporate structure is generally referred to in the tax code in two other sections. In Title 26, Subtitle A, Chapter 1, Subchapter P, Part V, Subpart A, Section 1273, it is stated in (c)(2) Treatment of investmentsxe2x80x94xe2x80x9cin the case of any debt instrument and an option, security, or other property issued together as an investment unit.xe2x80x9d This shows a bond and a stock can be joined. In the same section (b)(5), Property is defined to include services and the right to use property, but such term does not include money which is relevant when coupled with Title 26, Subtitle A, Chapter 1, Subchapter P, Part V, Subpart A, Section 1275, (a)(5) which statesxe2x80x94xe2x80x9cany debt obligation of a corporation distributed by such corporation with respect to its stock shall be treated as if it had been issued for property.xe2x80x9d The two statements together refer to a bond (debt obligation) distributed with respect to its stock (joined to stock) will be treated for tax purposes as if it had been issued for property. This does not include money. There is no reference to any bond being issued with respect to the corporations stock that has been issued for property or money, only that for tax purposes will be treated as if it had been issued for property. In fact all references to a bond in the code are made to the effect that the bond must be issued for something in terms of money or property. The reason is that all bonds have previously only been considered and used as investment securities. Investment securities in the financial reference literature are defined as generally, all classes of bonds and stocks, regardless of quality. Therefore any bond issued in an investment unit would be considered an investment security since all classes of bonds are investment securities. To have a bond in such a unit to be considered a non-investment security would require a specific stated issue price of zero for that bond. Without that specific statement any reasonable mind must conclude that some money or property was given, by the stockowner, as an issue price for that bond. To have had one price for the entire unit does not automatically lead to the conclusion that the bond issue price is zero and the payment is allocated to the stock. Both are considered investment securities which by definition requires an investment, of money or property, from the individual or entity that will receive benefits from the bond. There have been no references made to a bond being issued and joined to stock already outstanding. No reference has been made to such bonds being issued and joined to stock for no money or no property. therefore costing the owners of the stock nothing.
The concept of joining non-investment bonds to stock is a new and important aspect of any stock enhancement method or program. The stock enhancement is much more effective if the shareowners pay nothing for the bonds. Any stock enhancement should have the best elements of both stocks and bonds. To add the best elements of bonds to the best elements of stocks, and at no cost to the shareowner, will create a great demand for the stock. The price of the stock will increase which will make both the shareowners and corporate management happy. Shareowners make more money from their stock investments. Corporations can sell or trade stock and get more money or assets for the same shares. This will decrease the chances of corporate takeovers in that the company is too big or it""s stock is too expensive. Therefore, what is needed is a means to provide a combination of all these elements that can be exercised simultaneously with any business operation under the current tax law.
Accordingly several objects and advantages of my invention are to provide stock enhancement of a business entity under current tax law. To join non-investment bonds to the stock would add investment security and guaranteed corporate tax deductible payments. The potential price growth of the stock, possible splits of the stock, possible dividends, any voting rights of the stock would be retained by the shareowners. The cost to the shareowners would be only the price of the stock and nothing for the bond.
The invention is a method and apparatus for joining non-investment bonds to the shares of a business entity that is in treasury or is outstanding. Hence the title of the invention is a Share Bond which can enhance all types of stock from all types of business operations.
Share Bonds are joined to newly issued or outstanding shares of stock of a business entity or corporation by using a data processing system specifically designed for such purpose. The data processing system also provides separate data processing systems for updating and storing data, as needed, while a data processing system for payment and distribution is transferred to the corporation. This is important because corporations do not like to have their shareowners names publized. The data processing system also provides a certificate and a written agreement that sets forth the terms of the Share Bond to all shareowners, and the corporation has an understanding to honor those terms despite any or no acceptance from the shareowners. Basically, the shareowners do next to nothing and receive all the benefits. The only obligation the shareowners have is to own the stock and make certain the corporation knows that they own the stock so the checks get to the proper place. This is important because those checks could be larger than the dividend check would have been since the interest on the Share Bond will be deducted from the corporations revenue before taxes are calculated, thereby saving as much as thirty-four percent for corporations making a profit over $75,000. The shareowner can still receive dividends but they will not be guaranteed like the Share Bond interest payments are.
Share Bonds provide the greatest investment security when joined to shares of common stock since common stockowners are the last to receive money in a corporate liquidation. With Share Bonds these shareowners could be classified as senior debt, but subordinated debt still pays them before any ordinary shareowner gets anything. Guaranteed payments add to this greater investment security.
Once Share Bonds are on the market, corporations will make more funds available to pay the interest and the face value on the new Share Bonds. Less will be spent on those high executive compensations, luxury corporate jets, and other unnecessary corporate spending. Currently a great deal of business practices are done to avoid taxes by not paying dividends but Share Bonds can change corporate behavior in favor of shareowners. Most estimates are four out of ten Americans, most small investors, own stock. Share Bonds will give approximately one hundred million Americans the opportunity to receive fifteen to thirty-four percent more money annually from their stock investment, even if profits and corporate behavior remain exactly the same.
The Federal government can still tax the Share Bond interest payments at the capital gains tax rate, and there will be more to tax. This will leave most shareowners with about twenty-seven percent more money after taxes than is currently the case. Once this happens the issuance of Share Bonds will incease dramatically and cause stock void of Share Bonds to become devalued if not obsolete.
A secondary non-enhancement aspect of Share Bonds is that a business entity, if the accrual method of accounting is used, will be able to amortize the cumulative face value of all the Share Bonds over the maturity term of the bonds. That is, if the Share Bonds have a cumulative face value of ten million dollars and a ten year maturity the business entity deducts a million dollars a year for ten years from their corporate taxes. This money could be placed into savings and later used to pay off the Share Bonds when they mature. The shareowners receive more money without giving up the stock.
The Share Bond is unique in that it provides: 1) The capability for shareowners to simultaneously receive the benefits of both a bond and stock, while buying only the stock. 2) The capability for the shareowner of record to receive the benefits of the Share Bond for the price of zero. 3) No tax liability that otherwise might be incurred if one actually owned a bond since the Share Bond has only very restricted ownership that is more accurately stated as the shareowner being the receiver of benefits. 4) Stock enhancement that no other bond can since all other bonds are investment securities for raising money. 5) Exchange Share Bond that allows the corporation to re-issue stock with Share Bonds joined since this is simply a reallocation of price and the shareowners have no cost, no loss financially. 6) A dividend, interest, maturity, early redemption and substitution before principal components that allows the corporation to collect money for a bond principal, should it be required, without the shareowners paying any money. One example of the interest before principal is when the interest first generated from the Share Bond is not paid to the shareowner until the principal is met; subsequent interest payments are paid to the shareowners of record. 7) One purpose and must be joined to divisions of ownership to function.
Further objects and advantages of the invention will become apparent from a consideration of the drawings and ensuing descriptions.